Question Details
ABC Co. and XYZ Co. are identical firms in all respects except
for their capital structure. ABC is all equity financed with
$450,000 in stock. XYZ uses both stock and perpetual debt; its
stock is worth $225,000 and the interest rate on its debt is 6
percent. Both firms expect EBIT to be $51,000. Ignore taxes.
|
a. |
Rico owns $22,500 worth of XYZAc??cs stock. What rate of return is
he expecting? (Round your answer to 2 decimal places.
(e.g., 32.16))
|
| Rate of return |
% |
b. |
Suppose Rico invests in ABC Co and uses homemade leverage.
Calculate his total cash flow and rate of return. (Round
your percentage answer to 2 decimal places. (e.g.,
32.16))
|
| ||
| Total cash flow |
$ | |
| Rate of return |
% | |
c. |
What is the cost of equity for ABC and XYZ? (Round your
answers to 2 decimal places. (e.g., 32.16))
|
Cost of equity | ||
| ABC |
% | |
| XYZ |
% | |
d. |
What is the WACC for ABC and XYZ? (Round your answers to
2 decimal places. (e.g., 32.16))
|
WACC | ||
| ABC |
% | |
| XYZ |
% | |
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DATE ANSWEREDDec 08, 2020
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